Today I’d like to share a hard, but important lesson I learned in my trading career. At the time I considered it my worst trade ever; in retrospect it turned out to be my best trade.
Here’s why…
I started in the commodities business as a broker for a company called Conti Commodity Services. Conti was a division of Continental Grain Co. one of the largest and oldest grain companies in the world. Back in the 70s, Conti was just starting a new division to handle customers in the brokerage business. I was lucky enough to have them hire me as I had no experience and very little education. But, I was enthusiastic and willing to learn.
So there I was at Conti Commodity Services dialing and smiling and looking to get business for myself and the company. All this was back in the 70s when grain prices were skyrocketing. After a brief time on the job I guess I thought I knew better than everybody else.
So here’s my worst trade…
I was following the wheat market, just like everyone else because markets were hot. All of a sudden a slumbering December wheat market shot up dramatically on no news. I thought to myself that wheat had gone up too far and too fast, so I went short (that is I sold something that I didn’t own). It had to come down, right? That alone shows you how naïve I was back then. Well, for 20 minutes I looked like a hero. Rather than take a small profit when I had it, I decided I’d sit and wait for a bigger profit (call that greed). Well, you probably know what happened next, wheat closed up the limit and I was unable to get out of my short position and finished the day with a loss. Well I said to myself that wheat has got to pull back tomorrow, right? In the commodity markets, things only go from bad to worse when you’re on the wrong side of a trade and that’s what happened to me and my wheat position. I am not going to bore you with the gory details or the pain I went through, but the bottom line was I lost $10,000 on that trade. It doesn’t seem like a lot of money now, but back then when I was just starting up my career it seemed like an insurmountable fortune.
To be truthful it was the best thing that could ever happen to me and here’s why…
I learned a very tough lesson in that wheat trade, one that I’ve never forgotten. I’ve learned that there are two sides to every coin, two sides to every sword and two sides to every trade. For every profit opportunity you see in the marketplace there is an associated risk that comes along with that profit. I learned the value of risk management and why there is no free lunch when it comes to the markets.
Later in my trading career I’ve lost much more than $10,000 in other trades, but it never bothered me because I was managing my risk. A friend of mine lost over a million dollars on one trade. To many, this would seem like an insurmountable amount of money to lose on one trade. But my friend is trading with $50 million, so a $1 million loss is only 2% of his risk capital which is certainly very manageable. It is when you lose 40%, 50% or 60% of your capital on a single trade that it becomes very difficult, if not impossible to come back from.
So when I say my worst trade happened to be my best trade; I mean it. In my mind that early loss in December wheat was a priceless education in risk management that I still use to this day.
I cannot say enough about risk management and how you should manage your risk, but here are some trading tips that will help you avoid disasters like mine.
You must use stops. You must be disciplined. You must be diversified. If you have those three core trading items in your portfolio, you can survive and thrive no matter what the market throws your way.
I hope that like me, your worst trade turns into your best trade in the long run. In fact, I invite you to share a trade that taught you a lesson in our comments section below.
Every success in trading and in life,
Adam Hewison
President of INO.com
Co-founder MarketClub
I learn alot from each bad trade. Unfortunately, I tend to take myself out of the game for a year or two...........when I get back in, I usually win and build the account. Its almost like golf, where if you don't play for awhile, you can go out and be a natural.......its like you dont get overcomplicated, go with whats is ABSOLUTELY CLEAR TO THE NAKED EYE.......and forget the nuances.
Make you all laugh......I've traded since early 80s..........futures......you would call the broker and ask what they liked............and they'd place it..........call ya in the mornin and say ya lost 10K.............i did that twice over two years.....used to subscribe to paper charts, etc.
Another funny story........the second 10K loss from above I funded with a signature loan from a local bank. The bank was bought out right after I got the loan, and I never got a payment book, never got a statement, never paid a dime on it!
@ Steve Zook - Damn, bad luck man, I'm sorry to hear you got trapped in ANF. See those gap downs on the chart? The second gap down confirmed that the first was a breakaway gap down. This means it is not a capitulation gap down, not good. Also, do you use Market Club? If so, check out the -90 strong downtrend rating. Look man, don't think a stock can't go lower, it can ALWAYS go lower. I'm betting your original profit thesis was violated, if so, you've got to sell man. For example, if your original profit thesis was that earnings were going to be great, and then they were NOT, your profit thesis was violated and so you should get out. Another example, if your original profit thesis was that first gap down was going to fill, and instead of filling (a capitulation gap), it did another gap down (breakaway gap down), then your original profit thesis was violated and you have to sell. Don't rationalize why you're still holding and keep changing your profit thesis as the trade moves against you, rationalization is the devil of stock trading. I'm so sorry man to hear about this trade. Looks like that wicked $10,000 loss strikes again.
Let's see 40% drop in account value due to total mismangement and that is before I even get to put on a trade. Black Swan event, call it what it is, robbery by MF Global et al. Now is the time to look what else may be going on before the next event occurs. SPIC;FDIC for starters, just ask one question: Do I beleive these people have anywhere near the money claimed to resolve anything purported to?
the big rug pull of gold in sept wiped me out.........i kept buying with each leg down............never putting in a stop..........all summer long that strategy worked.........and i turned 2K into 15K..........I pulled half out thankfully.............and proceeded to get the killer margin call, which I didnt have, so they liquidated me.........still had to pay 500 more bucks
this occurred just before Rosh Hashannah, a date I knew to stay away from, but no, I had to keep buying because I couldn't conceive of gold going lower IN THIS FIAT MONEY ERA. wrong!
moral: always use stops
beware rosh hashannah to yom kippur time
dont think a trend cant be shattered regardless fundamentals
I was trading penny stocks just as you have described when I first started actively trading and was making a few hundred to a grand on early pump and dumps. I learned my lesson when I had entered a penny stock trade in the a.m. and trading was stopped on the OTC stock that afternoon. It was being investigated with suspicions that it was a fraudulent company. Trading was closed for several weeks and when it re-opened, it truly was a $.01 stock. I had invested at $.47. Lesson learned which will definitely stay with me. I have noticed a lot of these penny OTC stocks, as this one, have previously been a different kind of company and are incorporated in Nevada. These are ominous indications when you find them in the company profile.
Bought SKF (Ultra Short Financials) late September when the banks were tanking middle of the week and had to go out of town for a few days and couldn't keep a close eye on it. It first went up, then went down, then I was only loosing $100 dollars on a Friday, by Monday SKF opened much lower and I was already loosing, kept holding on, sold half the position, but held onto the rest and didn't get out when I had a chance. Long story short, lost more than I wanted to loose. Lesson: If you can't take the heat...don't buy leveraged ETF's. I like to use mental stops, but this would have been a good candidate for placing a stop with my broker. Right now I'm totally out of the kitchen...except for cooking Turkey on Thanksgiving.
Hi Everyone,
It's great to see so many people commenting. Keep them coming. I have been a member of INO for about 5 months and often wondered why there are often so FEW comments.
I am new to trading and I have taken a real hit recently with leveraged short ETF's and the super sharp upturn in the market during October. It made me very stressed ALL of the time so I too am hoping that, as LanceJ says, a loss of $10k is the lucky number and results in good lessons being learned.
I will try to take advice to 1) Deversify 2) Put in stops 3) Trade my plan i.e. don't get emotional - easier said than done.
Steve,
I am sure you had good reasons to buy this stock (a falling knife!! for me), but I wouldn't have as all indications were against "buy" during the weeks of 10/31/11 and 11/7/11. You should have had either a protective put or a stop-loss order at $53.36 (8% below purchase price - a suggestion by William O'Neal in his book).
Since price chart does seem to have any major support, it is more likely to fall further before turning up. Some sort of put option may be profitable at this stage. I would buy a $50 Put option for more than 2 months expiry time. ANF had a history of dropping from almost the similar price levels where you bought it, to about $15.
Steve Zook,
My advice for you is to go to google and search Edgar SEC. If you research ANF it will tell you what you need to know about the company. As for holding or selling, you can see with every trader that they either lost their cookies by holding or by selling. You'll beat yourself up either way. I suggest you pick which frustration you'd like to endure, watching the stock potentially crashing even more with a possibility of going back up or selling, taking your 11k loss and moving on. I have personally watched ANF change to better their sales. Did you know that target has a high brand designer and now Versace is not with H&M to increase sales, profits, and market to people who can afford the merchandise? I recently lost a lot of money in a stock that is my fail proof stock. I sold out when it hit close to bottom. I felt crushed but when it crashed an additional 30% I was certain I made the right decision. It opened up 2 days later and tripped it's price and is now still there. I lost money and it made me miserable inside, but watching it drop an additional 30% with my money would have been more devastating. We all lose money, I consider it tuition. Doctors pay $200k + for their knowledge and income, we all have to pay our trading tuition as well. Either way, you'll be fine. I paid $60,000 to college tuition, $12,500 to trading tuition in my life, and I know investing in myself in the form of tuition is my best decision ever. Happy trading
What do you call investing in a stock that has crashed? A long term investment ; )
I'm somewhat new to trading and had a horrible experience last week. I bought 1000 shares of ANF at $58. I was down $3 a share the eve of the earnings release. The next morning the stock gapped down to $47 a share. Currently Im down $11k. I'm still holding and wandering if I should wait to see if the stock will rebound. If anyone has any thoughts or advice I would appreciate it as this is very nerve wracking for me.
I think trading is very simple
1. decide what kind of trader you are long term or short term
2. Learn how to simply analyze the market - Up trending, Down trending, Range
3. Know what to trade for each phase
4. Research and understand what Risk Management really means since for any position over a reasonable time you have a 1 in 2 chance of being correct. I think there's a million dollars in that statement and i think Risk Management is completely different than what we are conventionally taught.
I hope i made sense.
There's something magical about $10,000. I don't know what it is, but it seems to be the amount of money you have to lose in a trade before you start getting better.
I lost $10,000 in a penny stock called Plasticon some 7 years ago. It was traded over the pink sh*ts. It was a fraud and the SEC just worked a settlement with the criminal CEO James Turek. The lessons I learned about how to spot a penny stock fraud and a half dozen other trading lessons would never have happened. The more painful the loss, the deeper the scar, the better trader you become if you have the strength to not quit.
best trade--crude oil contracts at $12.96 in the early 90's.
worst trade--2 put options on NYSE futures contract-$2000 each with the market initially going against my position, i entered a break even order to sell, and the market proceeded to go through it and drop another 6-700 points with those put options appreciating to $60-70,000 each.
In the mid to late 90's I started day trading with absolutely know idea of what I was really doing. Other than watching prices fluctuate by pennies I based my trades on that. On morning I logged on to my trading software to see the dow was down over 500 points. Panic set in and I sold everything hoping to buy back at a lower price.I lost close to $30,000. In a matter of 3 days the market was back to even. What made it worse was that one of the stocks I had sold ( I previously had 3,000 shares purchased at $11.00/share) had jumped to $100.00 in a matter of 3 months. I saw $300,000 profit slip through my hands. Live and learn. Stay mall and don't panic.
I mismanaged funds. It was in 2008 as everything the markets was sliding. I had opened long on Apple at $180 earlier in the year with part of it on margin. I had a margin call, and I wrote a check to cover it. But I wrote the check from the wrong account and it bounced. So, TD Ameritrade closed APPLE and couple other positions. Apple was around $89, sucks. It cost me dearly, and but reminded me to remember my checking account balances better. So that set me back $40K.
Adam.
I'm told that it's good therapy to talk about it!
My situation is, what was thought to be my worst trade, is my worst trade! It's getting later in 2008, the petro TSX looked doomed. I started to build a position in HOD.TO, a bit here and there. I was making money even up to the first significant correction. As the correction developed, I called my broker and talked to him about my trade. Fear set in, so I decided to sell and take a profit of $1500.
Call it fate or what, but within a week, a bottom was reached and my BetaPro Crude Bear was moving up again! I'm sure you know the feeling of a profit that could have been, at the top. You see, my 10K units were now worth $400,000.00. That hurts!!!
As far as errors, accidental or mental are concerned, I accidentally bought 1600 shares of NSU because my pre-market buy for 400 went OK, but a two-three minutes early buy order, which was stated as being too early, was "held" without my noticing that part and so I got 800. Fine. As I fiddled with the buy/sell snap screen I somehow wound up buying 400 twice because I didn't delete some details which would show price but not accidentally execute a buy order. My brokerage accepted my explanation and reversed 800 shares without charge but said their tracings did indicate buy orders did come from my computer.
Other times I accidentally sold stock. While planning a sell order for a reduced price in the usual "stop" format I accidentally offered to sell right now at the anticipated reduced price. I think my broker held execution and got a slightly higher price. Sometimes I sold a stock which was purchased in three lots total with the highest price being on the last purchase and yet I sold the grand total with a small loss on the last group purchased. That was due to a hasty opportunity which arose. Thus I had to sacrifice something while hoping to make up for it with the next purchase. This tends to work if a large group which is sitting there can be traded for two promising smaller stocks which may be more re-saleable (and pay dividends if the stock is held).
Actually at my miserable small scale of operation the action tends to be half the fun and if a pretty decent return is made so much the better. Education on market and political behavior is the most valuable component and will research and self study is a college education in itself.
Just the other day I invested 1100.00 into a penny stock that was a pump and dump situation which I knew. The week before I got in this stock a bit late meaning a couple of days after the pump started but I did manage to grab a few cents in my favor and get out taking a few hundred in profits. Here is where I got dumb. I continued reading the hype which a personal friend and I had discussed to stay away from. I got back in at 13 cents and the stock went just over 14 cents the next day and immediately started a fast backward decline and I was stuck. It has officially been dumped and I am left holding about a negative 900.00 loss. I am still in the trade with a limit sell till cancelled in case one day it returns but for now I am stuck. I am not worried about it but have learned the most valuable lesson which is.....get in a pump and dump right when you get the first notice of the pump which is usually just a few cents and you can purchase lots of shares. When the rise starts getting stagnant and the pump notices are few and far between sell all your shares and take those profits and just wait until the next pump and dump stock notification comes your way. To me this is how to gain a few hundred to a few grand on a single trade in a penny stock and it can happen in a week or two. What a great lesson and blessing it was because I can make up the 900.00 later but a great lesson is with me until the end.
Here is a fuzzy warning about FAZ right off the web page, "Fund Objective
The Financial Bear 3X ETF seeks daily investment results.." if you read the entire document, it goes further into the pupose of these misunderstood vehicles... http://www.direxionshares.com/etf/fbe_3x_shares.html?performance;funds=faz
If you read the prospectus of the highly leveraged ETF's, the fine print says that they are day trading instruments, in so many words. They should only be traded as that. I have done very well trading see saw style between FAZ and FAS, never holding for more than a day or a few hours, use the NAZ, SPX-500 charts and trade in the direction of those charts with FAZ and FAS. If you are nimble, you can do very well. I had a hard lesson to with an inverse real estate SRS I think...then I read the prospectus! DAY TRADING INSTRUMENT, NOT FOR LONG TERM INVESTORS
Mr Hewison,
Thank you for this wise advise and the example.
Kind regards,
Ikram
i had started trading on my computer, and the very first day i had made a profit of usd 2k, suddenly i lost 10k that very night, i was new to the stock market and had bought a 500 oz. I thought gold never falls...... Since then i have holed my pocket of 70k am still learning the tactics and am still a street fighter, and hope to recover before end of next year.
Billy,
Thanks for your feedback.
Sound like you could do with some one-on-one coaching. I will be less expensive in the long run.
http://www.marketclubcoaching.com/now/
Good luck to you,
Adam
My biggest Trading losses were at OIO. I suspect my broker was taking the other side of each deal and profiting off of me. I lost about $20k. I have never used a Broker traded account again. Marvin Ash was a persistent pest.
Early on in this decade, I owned shares of Tenet Health Care at about $40 per share.
One morning it was down $4 and I couldn't find any news on it. While it was only a 10%
drop it didn't feel right. Many times as we all know a stock will go right back up.
So I sold asap at $48 and not very long after that it was down under $10. That action
has helped me many times and usually saves me big loses.
Sal
Just recently I had 10000shares of a developing silver mine in Mexico which a brocker I had , Sold some good stock I had to buy this with out my consent. Gues what development took several years. Finally it came on the Market. For some 4.20 cts a share A couple or three runs at the market Finallyi t got to $ 6.12 a share I had decided $ 2. ashare would be a fair profit. I sold the whole 10000 Shares & quess what the price continued up Today its some $ 13.50 a share. I should have sold it in pieces. Lesson Patience. Some loss . what alesson. How to be Stupid.
Doug,
Thanks for your feedback.
You are not alone, every good trader I know including myself has gone through something similar. Don't dwell on it and enjoy the season.
Adam
About six months after I started trading (this was about 10 years ago) I bought 5 Gold futures contracts, just knowing that Gold was about to skyrocket. It was my first trade with multiple contracts and I wanted some protection, so I purchased 5 put options at the same time. They were pretty far out-of-the money, as I recall. Long story short, the next day Gold dropped like a stone and stopped me out of the futures contracts, but the puts gained value. The market continued to drop and I finally exited a week or so later with a $14,400 net profit (after the futures loss was subtracted). My biggest trade to date.
I think most growing investors have experiences like these along the way... let's just hope they learn from them and grow in their investment knowledge and portfolio.
I was trading for someone else's account several years ago and put an order in for 800 sh of a $5 stock but didn't realize it went in as 8000 shares and then the stock dropped as I had headed out of town for a Money Show in Vegas and when I arrived and check the account my heart nearly dropped when I saw the error but then it went up 60% and it turned out fine.
Dear Adam,
my worst trade/best trade has been with you in Ino.com: Alerts. I had over 4.000 stocks of Apple, at a medium price of USD 154,75, and during 2008 hold hold hold.. and watching your videos, and reading everything of Wall Street. Ino.com seemed to me, so serious, severe, not waisting time and always ponctual. Well, all that esteem, had a the worst result, on november 18, I received an email alert from you: Apple going to 80,00 perhaps falling 60,00. That day I seriously took your alert, phoned to the bank and sold.
Do you immagine, how much times and in how many ways I analyse my reaction?
now I managed to have some stocks of Apple, at a good price, but will be never able to have that trade back..
so far.. I learned most.
kind regards, Clary
Thanks Adam, I've learned the hard way to take those small profits
and let them add up -- rather than go for the home run and lose a big chunk.
Also, I stopped trading the juiced ETFs looking for the home run.
Elkojohn,
Thanks for your feedback.
Some of those juiced up ETF's or highly leveraged ETF's have been a disaster for most traders as they did and do not correlate to the underlying asset.
I think there's a lesson to be learned in all this, and that is, (A) Let a market trade for a while and make sure that market provides liquidity. (B) Provides the opportunity to profit. (C) See that it does track the underlying equity if in fact it is a ETF.
All the best and enjoy the holidays.
Adam
Being new to the world of Options I encountered my first BIG Options trade learning curve and that was using too short of an expiration date on a FREEPORT-MCMORAN COPPER & GOLD Call Option with "no stop discipline", it expired this past August at a $16,000.00 loss . . . . . and look at it now! If I had placed a longer expiration, if I had used stop discipline, if I had kept emotion out of it, etc, etc. Well, you get the picture! 🙂
I was on the wrong side of FAZ for the past year. Some resourceful shuffling and averaging down kicked me out with a 50% loss on the trade. It was a horrendous experience, but I learned a lot from it. Risk management is now a cornerstone of my trading. Stops are a must on all big positions. Hold and hope=death to traders.
-Spencer
Thankyou for sharing this invaluable market lesson Discipline,Diversification and Diligence.
Key elements in protecting capital.
Terence